Gary Alexander: Two Bets on Buffett

12/26/2003 12:00 am EST

Focus:

Gary Alexander

Senior Writer, Navellier & Associates

"Our two new stock recommendations are piggy-backed on the genius of Warren Buffett," says Gary Alexander,  editor of SmartMoney Investor Digest,  who recommends Berkshire Hathaway, as well as one of Berkshire's major holdings, Automatic Data Processing. Here are excerpts from his review.

"Our first top pick is pure Buffett. The original Berkshire Hathaway 'A' shares never split, so they sell for around $80,000 each, but we can buy into Warren Buffett's market wisdom at 1/30th the 'A' price, with Berkshire Hathaway 'B' shares (BRK.B NYSE) at $2,700 or so. (With online brokers, there is no higher fee for odd lots, so buy just one, two or 10 shares.) By investing in Berkshire Hathaway, you also get to read the "letter from the Chairman" each year, for free!

"Automatic Data Processing (ADP NYSE) is in the business of payroll outsourcing. With the 2001 recession and well-publicized 2003 layoffs, their business is down and the company just ended its 41-year run of consecutive earnings growth years. But if you believe that economic growth will continue-as I do- those jobs will come back, making ADP a bargain now. The company has over $2 billion in cash to cover just $85 million in debt. As a result, ADP is only one of seven non-financial US companies to earn a Triple-A credit rating. Warren Buffett recently increased his holdings in ADP from 443,000 shares at the start of 2003 to 5.7 million shares now. Of course, you can also own ADP indirectly, through Berkshire Hathaway, which has risen 4,000-fold since Buffett took control in 1966 (compared to a 10-fold rise in the Dow).

"Don't be fooled by the high price of Berkshire shares. The stock's valuation is squarely in Buffett's sweet spot: trading at 19 times projected 2004 earnings and about 1.7 price-to-book average. Those numbers would look even better if Buffett's huge core-holding in GEICO were carried at fair value. Some analysts put Berkshire's fair value at $100,000 a share (or $3,333 for the 'B' shares). Berkshire shares have risen a bit in recent months, but I would still buy the 'B' shares up to $3,000. Considering the fund's 27% cash position, and Buffett's cautious views on the overall market, I would treat this as a conservative 'all weather' anchor position. Buffett will navigate any bear market surprises with ease. ADP would be your first choice for better growth in the bull market scenario I expect to see."

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